Independent contractor -New legal standard in California

On April 30 ,2018 ,the California Supreme Court issued a seminal decision in Dynamex Operations West ,Inc. V Superior Court adopting a new legal standard for determining whether a worker is an employee or an independent contractor .In addition to changing the definition of who is considered an employee, the decision clearly imposes an affirmative burden on the hiring entity to prove that independent contractors are properly classified as such.I have been so busy with 10/15 filings and the new tax law provisions that I nearly let this important tax case slip by.

Under the California Court's new "ABC" test ,a worker is preemptively considered an employee under the California Wage Orders unless the putative employer can establish that ALL of the following three elements are met :

1) The worker is free from the directions and control of the hirer in connection with the performance of the work ,both under the contract for the work and in fact ;
2) The worker performs work that is outside the usual course of the hiring entity's business ;and
3) The worker is customarily engaged in an independently established trade ,occupation,or business of the same nature as the worked performed for the hiring entity .

I have reviewed a few of my Schedule C sole proprietors who have contracts with independent contractors and have concluded that some of them don't meet one or more of the 3 tests . I plan on having a discussion very soon and will suggest they consult with an employment law attorney.

I live in California and hire per diem workers. Prong 2 means I give them W2s despite them working other firms simultaneously and their own clients.

Fortunately I have an employment law attorney as a client and can probably get free advice on that.

This is still a grey area. Commentators elsewhere have pointed out that the case was primarily about industrial relations and labor law (overtime, workers comp, etc) and not income tax treatment per se. EDD has not indicated they are immediately going to start applying these new criteria. And it's being resisted:

http://advocacy.calchamber.com/2018/07/ ... t-workers/

Finally, it is perilous for non-attorneys to provide legal advice about worker classification, if not illegal.

I recently read that some cities were going to pay homeless people $15 n hour to pick up litter. I think those are employees of the city. Right?

Now I lay me down to sleep. I pray to God my soul to keep. And thank you God that i do not live in California. Amen.

I recently read that some cities were going to pay homeless people $15 n hour to pick up litter. I think those are employees of the city. Right?

I agree Jake, they should be requesting W-9s and running payroll for these new sanitation workers. One of the primary purposes of government is providing for the public health and safety.

Picking up litter is very much within "the usual course of the hiring entity's business".

Under the California Court's new "ABC" test ,a worker is preemptively considered an employee under the California Wage Orders unless the putative employer can establish that ALL of the following three elements are met :

1) The worker is free from the directions and control of the hirer in connection with the performance of the work ,both under the contract for the work and in fact ;
2) The worker performs work that is outside the usual course of the hiring entity's business ;and
3) The worker is customarily engaged in an independently established trade ,occupation,or business of the same nature as the worked performed for the hiring entity .

#1 and #3 already exist as one of the federal level "tests". I see #2 having a negative effect on small business in California.

I recently read that some cities were going to pay homeless people $15 n hour to pick up litter. I think those are employees of the city. Right?

I agree Jake, they should be requesting W-9s and running payroll for these new sanitation workers. One of the primary purposes of government is providing for the public health and safety.

Picking up litter is very much within "the usual course of the hiring entity's business".

And when the unions unionize these workers, the $15 an hour will skyrocket!

I'm curious what effect this is going to have on the newspaper delivery "business." About 2/3 of the employment ads in my local paper are for delivering my local paper as an independent contractor. There seems to be a lot of turnover.

The delivery people really have none of the attributes of independent contractors. The paper collects the money. All they do is drive the same route and deliver the papers--an integral part of the employer's business. It's just labor (at odd hours seven days a week) and use of their vehicle generating a relatively small monthly net "profit" with no opportunity to show aadditional profit or loss based on their independent ability.

Any new thoughts on this with Assembly Bill 5 going into effect on the 1st?

Mot states use the ABC test...

So lets say an out of state company uses a few independent contractors in CA. Lets also say that, under the new law, those contractors must be treated as employees for CA tax purposes. Now the out of state company has CA payroll. Does that mean they need to apportion income to CA? File a CA return? Pay CA minimum tax? Is this a backdoor way for CA to tax out of state companies not othewise operating in CA?

Between AB5 and Bindley, I don't know why anyone would use CA people if he/she didn't have to.

JR1- I don't think this is true. The "b"test " - the worker performs work that is outside the usual course of the hiring entity's business" is very problematic and I was under the impression that California was the first to attempt to adopt this language.

I am very concerned about this in the coming year. I think it will push more small business's into paying people under the table. I wish they had made an exception for small business and for hiring people for short periods.

I am confused about cases where you are hiring a small business to do work for you that is in the "course of the hiring entity's business". Think of a graphic design sole proprietor that hires another sole proprietor to work on a large project for instance. Also problematic in the construction industry though there are exceptions to this that I am struggling to understand.

Mot states use the ABC test...

Perhaps you could expand? I was under the impression that most states use some variation of the ABC test.

As EZTAX noted, the B element is unique to CA... maybe I read somewhere that MA also has something similar to the B element as well.

All, we cannot advise on this issue:

1. Please see Labor Code Sec 2753:

https://law.justia.com/codes/california ... 2753/2753/

This provision is not new, but it has become a topic in the discussion of AB5. Gag law, yes?

2. What I have been very consistently told is that the employee vs independent contractor issue is now a legal matter. Don't get caught practicing law. Refer to a labor law attorney.

As EZTAX noted, the B element is unique to CA... maybe I read somewhere that MA also has something similar to the B element as well.

Not sure that is the case. Oklahoma had the same test until 1/1/2020. Oklahoma just adopted the Federal definition. Before that it was:

(14) Notwithstanding any other provision of this subsection, services performed by an individual for wages or under any contract of hire shall be deemed to be employment subject to the Employment Security Act of 1980 unless and until it is shown to the satisfaction of the Commission that:

(a) such individual has been and will continue to be free from control or direction over the performance of the services, both under the contract of hire and in fact; and

(b) such individual is customarily engaged in an independently established business; or

(c) such service is outside the usual course of the business for which the service is performed and that the service is performed outside of all the places of business of the enterprise for which the service is performed.

Regarding post #17:

Not the same. The "and" modifier and second half, which CA dropped, actually makes it less constrictive than the CA standard.

Here's a good explanation: https://www.travelweekly.com/Mark-Pestr ... e-to-state

So...assuming the OK test was still in place and didn't expire 12/31/2019 and I don't live in either OK or CA:

I could hire a remote OK seasonal worker. They might be considered an IC as they are not physically present at my place of business. Have to examine the other two prongs.

I could hire a remote CA seasonal worker. They would certainly fail to be considered an independent contractor under the new CA ABC test as they fail the second prong in post #1, and would therefore be considered an employee unless I meet one of the "carveouts".

All, we cannot advise on this issue

Don't get caught practicing law. Refer to a labor law attorney.

Agree. There is a clause in my engagement letters in which I'm very specific that determining employee / indepedent contractor classification is the responsibility of the client and other advisors. I use the AICPA templates.

That said, I do like to know enough to be "dangerous" and put potential issues on a client's radar so they can seek advice from others. I don't know need to know how big the iceberg is, but enough to spot one on the horizon.

We've faced this in IL for as long as I can remember, and when I first had it explained by an auditor, I had to laugh. What exactly does that mean, since everything anyone does is in the normal course of business! He had no answer....just enforcement.

JR, using an example, I interpret it like this:

A burger quick service restaurant (QSR) hires a landscaping company to regularly mow the lawn and maintain the landscaping on the property. The landscaping company is obviously not engaged in a QSR trade or business, and the QSR is obviously not engaged in a landscaping trade or business. The worker relationship in this example passes the CA sniff test regarding The worker performs work that is outside the usual course of the hiring entity's business.